Just because foreign airlines may soon be allowed to invest in India's battered carriers doesn't mean they will.

New Delhi's expected move to allow global airlines to own as much as 49 percent in Indian carriers has been welcomed by investors as a potential lifeline for an industry mired in $20 billion of debt and on course to rack up $3 billion in annual losses.

But aviation-industry experts say any celebration is premature.

There's absolutely no reason to be bullish on airlines, said a Mumbai-based analyst with a local brokerage, who did not wish to be identified. Unless fuel and other dollar-denominated costs come down, nobody's going to invest in these companies, they're in such bad shape, he said, referring to a 16 percent decline in the rupee in 2011, which has driven up costs for local carriers.

Five of the country's six main operators are loss-making.

Taxes in India make jet fuel far more expensive than for global competitors. State-owned Air India, in the midst of an attempt to restructure $4 billion in debt, has slashed fares, forcing competitors to follow suit.

Two carriers, IndiGo and Go Air, have between them ordered about 200 planes for more than $23 billion, adding capacity to a market where dozens of planes already sit grounded.

And changing ownership rules will do little to alter India's unappealing market dynamics or regulatory environment.

Every airline will be interested in India because it's such a big market. But the environment should be conducive to the proper business processes, Akbar Al Baker, CEO of Qatar Airways, told Reuters recently.

India boasts the fastest-growing passenger market in major economies, as it soared 17 percent to almost 61 million people last year, and the potential is huge. With a comparable population, China's domestic air passenger market is five times the size of India's.

This is going to be the most important market for the next two to three decades. They [foreign players] need to have a very credible India story, said Kapil Kaul, regional head of the Center for Asia Pacific Aviation (CAPA), an aviation-consulting firm. (See India's Airline Growth.)

But, while global giants like British Airways, Singapore Airlines, and fast-growing carriers from Persian Gulf states covet an Indian presence, they may see little advantage in committing capital without further regulatory and competitive changes.

Meanwhile, the global airline industry is not in the best of health, either, as high fuel prices and sluggish economies in the United States and Europe crimp travel demand.

In December, the International Air Transport Association (IATA) warned that airlines faced more than $8 billion in overall losses this year if Europe's debt crisis spirals, and, even in a best-case scenario, the global industry was likely to see profits halve this year from nearly $7 billion in 2011.

Tough Market

Indian carriers, burdened with debt, are desperately seeking foreign partners, which would provide not only funds but also technical expertise and enhanced route maps.

Kingfisher Airlines is in the most need of a deep-pocketed partner. Controlled by liquor baron Vijay Mallya, it has failed in efforts to bring in fresh equity. Its banks own one-quarter of its shares, and the State Bank of India, its lead bank, refuses to lend more without an equity injection.

Kingfisher said last month it was in talks with Hong Kong-based distressed-debt firm SC Lowy Financial for a possible investment.

The prospect of foreign funds flowing in has boosted shares of India's airlines, with Kingfisher climbing 7 percent since mid-January, when India's aviation ministry said it favored allowing foreign airlines to own as much as 49 percent of local carriers. Shares in budget carrier Spicejet have risen 20 percent, and market leader Jet Airways 29 percent.

But caution remains.

Citigroup said the probability of foreign carriers investing up to 49 percent is limited, given already sizeable market shares on key international routes into India and existing code-sharing agreements with major domestic carriers.

In the short term, the only advantage of this news flow is that it could improve the perception of the credit quality of the aviation sector, Citi said in a research note.

The poor health of the nation's airlines prompted the federal government to take the first steps to open the sector, even after it retreated from a similar plan that would have opened the supermarket segment to foreign investment.

The cabinet meets next week to decide the fate of the aviation ministry's proposal.

Usual Suspects

British Airways has long been touted as a candidate to take a stake in Kingfisher, which will this month join the UK-based airline in the global Oneworld alliance. Gulf-based Etihad, Emirates, and Qatar Airways are also seen as potential investors in India.

I think Kingfisher is going to attract more [foreign direct investment] attention because it is already into an air alliance, it's already partnering with international airlines. So I think any airline in that group can come up and pick up a stake, said Sharan Lillaney, an aviation analyst at Angel Broking in Mumbai.

CAPA's Kaul said once Kingfisher finds funding in the near term -- it needs at least $400 million, he figures -- it will be easier to attract money in the future from foreign sources.

Malaysian long-haul budget carrier AirAsia, which plans to scrap unprofitable routes to Europe and India, could be interested in re-entering the Indian market, analysts said.

Companies [that] want to create a global airline group, like Lufthansa, Singapore Airlines, and Cathay Pacific, and Middle East carriers like Emirates and Etihad, I think most of these will be interested in entering India, Kaul said.

British Airways, Singapore Airlines, and Lufthansa said separately they favor liberalized foreign-investment rules in India, but could not comment on their potential interest before the proposal becomes law.

(Additional reporting by Tjibbe Hoekstra in AMSTERDAM, Praven Menon in DUBAI, Adveith Nair in LONDON, Maria Sheahan in FRANKFURT and Harry Suhartono in SINGAPORE; Editing by Tony Munroe and Ian Geoghegan)